Question

Ms. Xie, who is in the 37 percent tax bracket, is the sole shareholder and president of Xenon. The corporation’s financial records show the following:

Gross income from sales of goods	$	1,590,000
Operating expenses		(930,000	)
Salary paid to Ms. Xie		(300,000	)
Dividend distributions		(200,000	)

1. Compute the combined tax cost for Xenon and Ms. Xie. (Ignore payroll tax.)
2. How would your computation change if Ms. Xie’s salary was $500,000 and Xenon paid no dividends?

Answer 1

Computation of the combined tax cost for Xenon and Ms. Xie. (Ignore payroll tax.)

Gross income from sales of goods	$1,590,000
Less: Operating expenses	$930,000
Gross Profit	$660,000
Less: Salary paid to Ms. Xie	$300,000
Xenon's Taxable Income	$360,000
Less: Corporate Tax (34% of taxable income)	$122,400
Net Income	$237,600
Dividend distributions	$200,000
Tax on dividends (20% of dividend)	$40,000
Ms. Xie tax on salary (37% of salary)	$111,000
The combined tax cost for Xenon and Ms. Xie. (Corporate tax + Tax on dividend + tax on salary)	$273,400

Computation change if Ms. Xie’s salary was $500,000 and Xenon paid no dividends -

Gross income from sales of goods	$1,590,000
Less: Operating expenses	$930,000
Gross Profit	$660,000
Less: Salary paid to Ms. Xie	$500,000
Xenon's Taxable Income	$160,000
Less: Corporate Tax (34% of taxable income)	$54,400
Net Income	$105,600
Dividend distributions	$0
Tax on dividends (20% of dividend)	$0
Ms. Xie tax on salary (37% of salary)	$185,000
The combined tax cost for Xenon and Ms. Xie. (Corporate tax + Tax on dividend + tax on salary)	$239,400